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Are Tokenised Assets the Future?

Published by Charles Gubert

Two years ago, cryptocurrencies such as Bitcoin exploded onto the scene. As more retail investors started piling into this nascent asset class, its price reached unfathomable heights, only to plunge dramatically not long after. Happening in parallel to the cryptocurrency bubble was the sudden proliferation of initial coin offerings (ICOs), best described as an unregulated crowdfunding device popular among (some) technology start-ups, which leverages blockchain to raise funds from investors through the issuance of cryptocurrencies.

Most institutional asset managers chose not to invest in cryptocurrencies or ICOs as the instruments were seen as being largely unregulated and vulnerable to fraud, money laundering and excessive volatility. While these earlier digital asset architypes are unlikely to ever capture the institutional market’s interest, tokenised assets could. Tokenisation is a process whereby rights or a unit of asset ownership is converted into a digital token on a Blockchain.[1] Not only can tokenisation be applied to conventional equities and bonds, but also real assets, copyrights, intellectual property and potentially even exotic cars and art. [2]

Tokenisation – the future of financial markets?

In theory, tokenisation offers a number of benefits for investors. Firstly, it allows for the underlying assets to be fractionalised making it easier and cheaper for investors to participate in capital markets. Tokenisation can also enable previously illiquid assets (i.e. property, real assets, works of art) to be traded more seamlessly creating greater market liquidity in the financial system too. This, for example, could make it simpler for market participants to procure non-cash collateral for their securities lending or repo transactions.

As transactions in tokens use embedded smart contracts, the buying and selling process is automated, meaning there are fewer intermediaries and costs. [3] “A security token is capable of having the token-holder’s rights and legal responsibilities embedded directly onto the token, along with an immutable record of ownership. These characteristics promise to add transparency to transactions, allowing you to know with whom you are dealing, what your and their rights are, and who has previously owned this token,” says a Deloitte white paper. [4]

Major barriers to tokenisation still to be resolved

Right now, regulation of tokenisation is a grey area and standardisation is unlikely to materialise anytime soon. Nearly all interested parties agree that tokens should fall under existing securities laws but there is still a lot of uncertainty about the exact legal status of these embryonic financial instruments. In response, industry experts have since asked regulators to introduce iron-clad rules or publish comprehensive guidance on tokens, not least around their issuance and sale. Without regulation, the market will struggle to grow.

Other impediments are more fundamental. “How tokens will remain linked to the real asset that they represent is a point of concern. For example, imagine if you own tokens representing a small fraction of 100 gold bars at a bank, and five bars are stolen. What happens to  your token and to the other token owners is crucially important, since the value
of tokens becomes greatly undermined if they cannot be proven to be linked to real-world assets,” reads the Deloitte paper.  Deloitte also caveats that unanswered questions on  governance and security around tokens needs addressing as well by market practitioners. 


Like many other disruptive technologies, asset tokenisation is in the early stages of development. However, what is clear is that effective regulatory supervision, assurances around security and robust governance standards will be pivotal to its future success.  

[1] BNY Mellon (June 2019) Tokenisation: Opening illiquid assets to investors

[2] BNY Mellon (June 2019) Tokenisation: Opening illiquid assets to investors

[3] Deloitte – The Tokenisation of assets is disrupting the financial industry: Are you ready?

[4] Deloitte – The Tokenisation of assets is disrupting the financial industry: Are you ready?